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Contraction Contrition
A bi-weekly column with timely, relevant and possibly irreverent insight into the BC technology industry.

Something Ventured:
October 25th, 2002


By Brent Holliday
Greenstone Venture Partners

 

"Is something wrong?" she said.
Of course there is.
"You're still alive," she said.
Oh, and do I deserve to be?
Is that the question?
And if so, if so, who answers? Who answers?
- Pearl Jam, Alive

We are still mired in this muck of a downturn. In the recent spat of earnings announcements by technology bellwethers, I did not hear about any upward momentum in technology spending. Microsoft did their nice quarter with mirrors (deferred revenue and a change in the way they do long term software licenses made their quarter seem great). Most companies stopped the trend down in profit through cost cutting, not increased revenue. Sure, the market bounced back nicely, but gravity is still pulling that line on the chart.

If this continues for another 12 to 18 months, one has to think of changes that entrepreneurs and larger company CEOs will make in order to adjust to the vagaries of this market. Choice number one is to throw in the towel, but that is the easy way out. Choice number two is to cut costs dramatically to ride out the storm. Most, if not all, companies have done this. The result is a lot of tech people out of work and a brutal job market for at least another year.

A friend and former co-worker sent an e-mail this week as he contemplated the broader implications of the current cost-cutting strategies. He is in the software industry in the Silicon Valley and has worked here in Vancouver and down there. Here's some of his e-mail that he was prompted to write after reading an opinion of the same sentiment in the San Jose Mercury News last week:

Brent,

I am concerned about this trend of moving commodity software development, like quality assurance, offshore. As this trend develops what's to stop core engineering from moving offshore as well? While I am not a protectionist and believe the free-market should rule, I have concerns about what this means to our industry - especially Canada. I see that there are several companies in BC who are making out quite well doing contract coding. What does this mean for them? Are they now in a fight with similar companies in Asia? Does this mean that the pay scale for these jobs will be determined by who can do the job cheapest? Is software engineering now a commodity business? How does the Tech industry in BC now encourage young people to go into this field if after the cost of paying for such an education the return pay scale is based on one that is set on the cost of living in a country where competent knowledge workers are literally a dime a dozen?

If you recall history, after the PC boom when semiconductors became a commodity the same thing happened. As this initial spike in the Internet settles down and doing business on the web goes mainstream do we not foresee the same cycle repeating itself? After all, what do I care where my companies website was developed? I just want it built yesterday and for next to nothing.

I'm not looking for answers, just wanted to see what you think. I mean it wasn't easy to get work after I got laid off last year and although I am gainfully employed at the moment, it's not full-time. Things don't look like they will pick up any time soon. I already know five people that I worked with in the past who have given up on the tech sector after having worked in this area much longer than I have. Two are in real estate, one is selling insurance, another invested in strip malls and the final guy (who happened to be a senior customer support manager) is now selling pants at the Gap. Once this contract runs out, I'm wondering if my next job is going to require me to ask, "Would you like to Supersize that?"

Bimal Parmar McAfee.com

Things are so grim in the job market in the Silicon Valley that a former executive that Bim worked with had a domain registered in his dog's name (for a future web site, I guess) and received an e-mail looking for the HR director of the presumed company named Laddu. I read the e-mail. The guy was very experienced and he was desperately trying to differentiate himself. Apparently Laddu wasn't impressed enough to hire him. Didn't pass the sniff test, I guess.

Getting back to the core issue brought up by Bim, will there be a permanent loss of jobs out of North America in software engineering? The issue with any job sector that moves to low cost labour is this: Can it be a commodity? Telesales is clearly a commodity and can be done from anywhere. Quality testing of software code is becoming a commodity. Contract coding of custom applications is moving that direction, especially with the standardization of web application frameworks and the predominance of new software tools based on these frameworks. Any enterprise looking to lower costs of contract development should consider some of the advantages of groups that do the grunt work off-shore.

What about the company that has its core business as software development? Will core development functions move off-shore? Much of what is done in software product development is so iterative in nature that it would be difficult, if not impossible, to have people halfway around the world develop source code. Product managers cannot be 10,000 miles from the developers in critical development cycles. Also, true innovation in application ideas or underlying architecture will not come from $3 a day programmers in Thailand or Bangalore.

The automobile industry, the consumer electronics industry, the semiconductor industry, the PC industry and the wireless phone industry have all shown us that low-cost manufacturing production eventually flows through the lowest cost countries in the world. Software, to the extent that it is "manufacturing", will fall into the same cycle. Things that are "easy" or repeatable in software development will move away. Our current economic condition and cost-cutting will accelerate it. But will the job losses be huge? I don't think so. Will the pay scales move down here to match the low pay elsewhere? That has not been the pattern in any of the other industries. Mind you, some of them had huge unions here that pretty much prevented any movement on pay.

The San Jose Mercury article writer had a very good point about how to "save" these job losses overseas. We have to create new ones. In the absence of the new new thing (PC boom, client/server computing, Internet boom) we can't create new jobs, with new talents and experience required that drives good, North American type salaries. What is it out there on the horizon that will allow the sophisticated C++ programmer to re-train quickly and be part of the innovation that the low-cost countries can't do? I don't see it yet and neither did the writer, but the key to job creation clearly lies in innovation.

Wherever there is change, there is opportunity and entrepreneurs look to exploit opportunities. From the "if you can't beat 'em join 'em" file, I have another friend who used to be in investment banking (another industry that has a lot of people looking for Gap jobs) in Asia, who now runs a contract software development business himself. He serves Japan, Singapore and other more developed Asian countries with low-cost programmers in Thailand and Vietnam. Business is very good. His typical client needs custom development around a standard Windows based program (accounting, transaction processing, supply chain, CRM) that his programmers are familiar with..

What else can an entrepreneur do in the face of lower cost operations? An entire industry was created in the world of semiconductors when low cost production went to Taiwan and Singapore: the fabless IC design industry. Broadcom, PMC-Sierra and other became very large companies, employing many North Americans, by exploiting the fact that production of their chips could be done elsewhere. The enormous jobs lost at these firms are due to the telecom downturn and not cheap Asian competition. This is exactly what I mean when I mentioned new business models that might be created out of necessity in this downturn. Where is the next fabless IC design industry?

The solution for lost jobs and commoditization of some of the software industry is to find the next big thing that drives demand, or, as in the fables design model, find a new way to do business that leverages the commoditization, spurring a bunch of new companies in North America. Innovation in the form of disruptive technology and/or in the form of how to do the business of technology should be the highest priority of policy makers here in BC and elsewhere.

When you bring this problem of lost jobs from the abstract generalities down to the individual, it seems clear to me that you must avoid being in the "dime a dozen" category, as Bim put it. To avoid losing a job to lower cost countries and never finding work in the industry again, you have to get the skills and the experience that separates you from the pack. It's the old adage about facing a bear in the woods: I don't have to outrun the bear to survive; I just have to outrun you.

Letters from Last Time -

Re: A Very Limited Partner

Brent,
I liked your article even though I didn't completely agree with the overall tone that it's mostly bad news on partnerships. I think you are mainly right that too many small companies don't get the results they hoped for. Mostly I think this is bad planning and execution - i.e. lack of an understanding of what a partnership is and does, lack of a strategic plan, lack of development of a mutual value proposition to the end customer.

I've also spent over 20 years on the big partner direct sales side with IBM, EDS, PeopleSoft, i2 Technologies and JD Edwards. I know many times I won the deals because of my partners' ability to differentiate my offering to the end customer. Yes, it helped if I got some sort of compensation for helping sell their product, but that was the exception not the rule. In the end, closing the deal with a partner vs. losing to a competitor was always the major motivation to work with them. Smart sales people understood their partner's, learned how to work with them, and helped build their business for both parties mutual benefit. Smart companies encouraged this. Not every big firm I worked for was partner-smart, but enough were for me to learn the difference.

Personally, I never saw the "evil partner" aspects you referred to, but it was quite common to partner with an outside company to fill a gap in our product line that was currently in development. Sometimes Development delivered a better, more tightly integrated solution, and sometimes it wasn't as good as the partner's product, in which case I kept selling the solution that delivered the best value to my prospective customer. Most good partners were aware that we were developing something and tried to keep a step ahead of us - admittedly a stressful option for them. Sometimes (rarely) we acquired them.

I think one of the major weaknesses I see in a lot of the junior BC tech companies is in the sales, marketing and partner operations. I'm not sure how to address it, because it's even more amorphous than executive leadership, but I think its one of the keys to making the local tech sector more successful. It's unfortunate that so many companies think they need to move sales operations to the U.S. to succeed. I'd love to hear your thoughts on that topic.

All the best, and thanks for writing something that moved me to respond.

Don Hamelin
PricewaterhouseCoopers

Don: I had a little fun being negative on partnerships. Of course they work because it is and will always be a necessary part of business, especially fro a start-up. You do make a very good point about a weakness in BC. If my column was the "What to Watch Out For" reality check for doing partnerships, then people like yourself and many other fine, experienced technology marketing consultants in this town should be the guides for getting it right on the execution part. As for the sentiment of moving marketing and sales to the U.S., that is a good topic. Too long to address here, but noted for future subject matter. Thanks for writing.

Hello Brent: Your column on strategic partnerships certainly struck a cord with me. Although I do not have "business development" on my card, I have seen this type of partnership sink a company. In our scenario it was the one-hand-doesn't-know- what-the-other-is doing game (a variation on the partner is too big and slow).

The VP with the authority to sign up for a strategic partnership did not have buy-in from the various technology managers within the firm to actually USE the product (great for Business Development but no adoption generally throughout the The Big Company). Large companies are made up of, well, many people. If only one or a few (albeit senior) people really want the relationship you're sunk.

Heather Regehr

Heather: Yours is one of a few stories of bad experiences that was sent after the column last time. Yours was the only one that didn't mention names! Your story is a classic tale of big companies having many hangers-on and not paying attention. It's critical that the little company doggedly pursue the bigger partner and keep your partnership front and center. Add into the current mix of big company deals (done in the past two years) the incredible turnover of people due to job cuts and stinky stock prices. So many partnerships have stalled due to new people coming in and thinking very differently than the person you did the deal with.


What Do You Think? Talk Back To Brent Holliday

 



Something Ventured
is a bi-weekly column designed to supplement the T-Net British Columbia web site with some timely, relevant and possibly irreverent insight into the industry. I hope to share some of the perspective and trends that I see in my role as a VC. The column is always followed by feedback (if its positive or constructive. I'll keep the flames to myself, thanks).

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